Are you in an industry that is likely to tip towards a standard? Does your product’s technology benefit from a network effect in which the value of the network increases as the number of people connected to it increases? For example, it’s much easier to initiate a virtual meeting with a client, or develop a video game for a gaming console if everyone uses the same technology. When a technology that exhibits a network effect reaches its critical mass (or tipping point), adoption spikes and its place as the standard solidifies.
The takeoff period displayed in the diagram above results from, “a strong desire of users to select the technology that will ultimately prevail-that is to choose the network that has (or will have) the most users. As a result, the strong get stronger and the weak get weaker; both effects represent the positive feedback so common in markets for information infrastructure.”
In order to win the standards game, it’s important to manage consumer’s expectations though the support of influential partners and clients in order to be seen as the inevitable winner thereby capitalizing on strong positive feedback. If you are lucky enough to gain momentum from positive feedback, you will create a self fulfilling prophecy: “When two or more people compete for a market where there is strong positive feedback, only one may emerge as the winner.”
The network effect is equivalent to an economy of scale of the demand side. The chart below shows that a market is most likely to tip towards a single standard if it displays economies of scale as well as a low demand for variety.
Figure 3: Likelihood of a Market Tipping to a Single Technology:
If you are in a market where there is low demand for variety and high economies of scale on the demand side, the market is likely to tip. In order to influence the market to tip in your favor, develop key partnerships and influential clients who will help to promote the product and influence the industry’s expectations. You should be willing to operate at zero profit to try to win this game, as it’s often an all or nothing scenario.
Examples of Products & Industries that naturally move towards a standard:
- Video game consoles / titles (such as x-box versus Playstation)
- Recording formats (such as Blue Ray versus HD DVDs)
- Instant Messengers
- Social Networks
- Data storage devices (such as zip drive versus CD-R)
- Broadband technology
Reference: INFORMATION RULES, Carl Shapiro and Hal R. Varian, 1999.